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Is RSA Insurance Group plc A Recovery Buy For 2014?

2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.

Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 6.9% this year, and is 50% higher than it was five years ago.

Unfortunately, RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US) hasn’t joined the rally, and a multitude of profit warnings and other problems have seen its share slump by 28% so far this year, leaving them 35% lower than they were five years ago.

Back to basics

Will RSA prove to be a recovery buy that outperforms the market in 2014? I suspect it’s too early to say, but one thing we can do today is to treat RSA’s falling share price as a potential buying opportunity, and take a look at its fundamentals, to see if they show any signs of offering investing value:

Ratio Value
Trailing twelve month P/E 8.8
Trailing dividend yield 6.9%
Net asset value per share 99p*
IGD surplus cover 1.5 x

* 92p exc. pension deficit.

On the face of it, these figures don’t necessarily seem too bad, but in reality, they’re not great. RSA’s second-half earnings are likely to fall, increasing its P/E, while a further dividend cut also seems likely, as RSA seeks to preserve capital to save its ‘A’ credit rating.

Similarly, although RSA’s shares currently trade at a discount to its book value of 99p per share, this has fallen from 107p at the end of last year, and excludes a 7p per share pension deficit. The firm’s IGD surplus cover — a measure of capital in excess of regulatory requirements — has also fallen this year, from 1.9 times at the end of 2012, to its current level of 1.5 times.

A troubled year ahead?

RSA’s latest update says that it is undertaking a full review of its business and expects to deliver ‘mid-single digit return on equity’ in 2013 — which by my reckoning equates to earnings per share of 6-7p.

The question is whether the firm’s profits can recover quickly in 2014. At the time of writing, analysts’ consensus forecasts have been downgraded for 2013, but remain fairly positive for next year:

2014 Forecasts Value
Price to earnings (P/E) 7.3
Dividend yield 7.1%
Earnings growth 59%
P/E  to earnings growth (PEG) 0.2

To be honest, I don’t think these figures are realistic; I expect to see a further round of downgraded forecasts in the next month or two and believe that a dividend cut is also likely.

Despite these risks, it's possible that RSA will recover strongly in 2014 and could be a strong buy.

Ultimately, the decision is yours, but one thing I am sure of is that RSA's near-7% dividend yield isn't very safe. Indeed, it only passes two of the five dividend tests detailed in the Motley Fool's latest special report, "5 Golden Rules For Building A Dividend Portfolio".

These rules are aimed at providing you with a reliable, rising dividend income. For full details of all five rules, click here to download your free copy of this brand-new report today.

Roland does not own shares in RSA Insurance Group.